We are increasing our fair value estimate of Alphabet (GOOG) to $910 per share, from $860, based on Morningstar’s belief that U.S. corporate tax reform is expected to settle on a 25% tax rate beginning in 2018. We are also incorporating a 10% repatriation tax on overseas cash. In addition, while the European Commission decided to fine Alphabet’s Google approximately $2.7 billion (as announced on June 27) due to what it views as violation of European Union’s antitrust laws, the fine represents only 0.5% of our current valuation of Alphabet. Google is likely to appeal the decision. If not overturned, this decision could set precedent for larger antitrust cases related to Google’s Android and search ads, on which the European Commission continues to work. In our opinion, a final decision on the most recent ruling and other cases could take years, and we have included their impact in our bear-case scenario of Alphabet’s valuation. In the meantime, we expect continuing growth in Alphabet’s cash flow as we remain confident that Google will maintain its leadership in the search and digital advertising market. Further, while Google is not leading the cloud market, in our view, the firm is well-positioned to become one of the top three players in what Gartner believes to be a $32 billion market today that is expected to grow at a 26% CAGR through 2021. In addition, we view the investment of some of that cash in futuristic projects (or moonshots) as attractive. One example is when Alphabet made its self-driving car project a separate company and named it Waymo, indicating that the probability of one of the firm’s "Other Bets" paying off has increased. While we remain confident in Alphabet’s ability to execute well and successfully tap into additional markets, we continue to recommend a wider margin of safety before getting into this wide-moat name as shares are trading in 3-star territory.

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